After more testing I have narrowed the issue that I left off with to a problem with the yum conf inside of the chroot.
I just got the patch working to the centos-5 postinstall script that does fix this issue. So to clarify I did add to /etc/rinse/centos-5.packages
Those package were
e2fsprogs-libs
authconfig

That was early in the debugging and after I found the real issue I removed those packages without causing issues.
So what do you need to do to bootstrap centos5 with rinse? All you need to do is apply a small patch to the post install script. Here is the patch rinse-centos5.patch.

Thanks for the fix! It helped with some issues. Still had a Yum/SQLiteCachec problem after all this, finally fixed it by adding yum-metadata-parser to the package list to download in the rinse configs.

As of now, the most recent version of rinse in Debian already incorporates Nick’s patch and installs yum-metadata-parser for centos-5, so I had just to add these 3 lines:
nss
nspr
python-iniparse
to /etc/rinse/centos-5.packages and it worked like a charm for CentOS 5.3!

Did anybody try to send the patch upstream to Steve the xen-tools developer?